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Iceland Eyes Higher Taxes On Tourism

by Ulrika Lomas,, Brussels

30 August 2012

Icelandic Finance Minister Oddný Harðardóttir has said that she intends to raise the value-added tax (VAT) on accommodation from the reduced 7% rate to the standard 25.5% rate, with effect from May 2013.

Harðardóttir has said that the Icelandic tourism industry no longer needs to be subsidized by the state now it has recovered from the financial crisis, citing increased turnover due to the now cheap Icelandic króna (ISK). Applying the standard rate of VAT on tourist-related services was therefore justified, she argued.

The reduced rate of VAT on accommodation had initially been implemented as a means to boost the tourism industry in Iceland, which has been striving over recent years to rebalance its economy away from the financial sector and real estate.

Predictably, the tourism industry has opposed the move strongly, arguing that the favourable ISK exchange rate is only temporary and that the Icelandic currency is already showing signs of strength following the recent central bank interest rate hikes.

Citing already expensive flight costs due to aviation taxes, the industry has voiced concerns about the competitiveness of Iceland as a tourist destination. It also warned the government against implementing tax hikes too fast and cautioned that high taxes may have adverse effects for the government because high tax rates ultimately shrink the tax base. The tourism industry has also mentioned that investment in hotels might decline if indirect taxes push prices too high.

TAGS: Finance | tax | Iceland | travel and tourism | currency

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